‘The banking business is purely a long-term bet’

IDFC is keen on bagging a banking licence to diversify its funds and avoid focusing too much on infrastructure, says CEO Vikram Limaye



In the last six months, the Cabinet Committee on Investments (CCI) has been clearing dozens of large infrastructure projects. Are things actually moving on that front? As a lender, have projects come to you for funding?

Not a whole lot. You see, CCI clearance is only a government decision. It then requires somebody else to execute it. For many projects, there are state-level clearances to obtain too. So the CCI helps in terms of a clear decision and direction from the government.

However, follow-up at the state level needs to happen. That’s why a lot of the projects haven’t really taken off at ground level even after six months. The move by CCI to fast-track projects is positive. But if the question is whether this has led to an immediate revival in investments, the answer is no. Most of these government clearances will see an impact with a lag.

In any case, what you can realistically expect from the current government is to execute decisions they have already taken, and not any new policies or major reforms. However, even if they expedite some of the existing projects and implement what they have already announced − for instance, the pass-through of coal prices or spectrum issues in the telecom sector − that in itself will release some of the capital stuck in these projects. I don’t think we can hope for anything more until the elections in May.

The government has initiated power sector reforms with some sops for state electricity boards (SEBs). Will this help revive the power sector?

These reforms are definitely positive for power companies from a long-term view point. But it will be important to see if SEBs will put out power purchase agreements (PPAs) and actually start purchasing power. What you find now is that generation companies do not have PPAs to bid for. Then, consider Coal India. Even after the presidential directive was issued to Coal India, it signed fuel supply agreements only after 15 months. So clearing logjams takes a longer time than you want it to. We need to understand that there is a ‘flow’ problem here as well as a ‘stock’ problem. While the ‘flow’ – new projects – can be addressed by new policies, glitches with older projects, the ‘stock’, cannot be resolved without follow-ups. I am hopeful though that such issues will get sorted out in the next few months.

What are your thoughts on the large restructured assets in the banking system? How will this play out?

The RBI has come out with a new framework seeking timely restructuring of accounts and prompt recovery. We need to see how this pans out. It’s true that some of the non-performing assets (NPAs) in the banking system are deferred through some of the mechanisms available. But as long as the banks are working at a long-term solution, it is not such a bad thing. Some of these mechanisms are required, given the way the economy has been in the last three years. Otherwise, banks’ capital will be severely eroded and impact their growth. It is important, though, that there is a real effort to find a solution and banks are not just kicking the can down the road.

Many PSU banks go through a Corporate Debt Restructuring (CDR) mechanism, wherein there is a consortium of lenders. So from that standpoint, there is a pooling of expertise. Banks have also been under pressure to contain NPAs in the last one year and hence, many of them are rushing through the CDR process. And that’s what the RBI is concerned about: whether these are genuine restructuring cases or potential NPAs that are being deferred. That’s why the RBI has proposed the new framework to make banks more proactive. They have now tightened the norms to ensure that there is some accountability from promoters.

Everyone seems to be banking on a revival in the economy to automatically solve the NPA problem. Will it?

In a way, that will be part of the solution. For the simple reason that if growth picks up in a significant way, the NPA numbers will look better simply because the denominator − the loan book − will grow. As you lend to healthier companies in a healthy macro environment, quality of the book will tend to improve.

Given the challenges in the sector, what is the growth outlook for IDFC?

Our balance sheet growth will be flat to negative for 2013-14. For the next fiscal, it will depend on how investments translate into activity on the ground. Also, we need to see how the election results pan out. But even then, any new project activity will pick up with a lag and hence, even 2015 will be a difficult year in terms of growth. But you might see sanctions picking up as new projects kick start.

What about the stress on asset quality?

We have been saying that given the risk in the sector, we cannot be totally immune to it. So we expect our gross non-performing assets to hover around 1-1.5 per cent of loans. In terms of restructured assets, projects which are stuck due to structural reasons have to be recast. Due to non-availability of gas, most of the gas-based projects are restructured. But they are clearly not future NPAs as once the availability improves, the projects can be commissioned.

Other corporate groups have pulled out the race for new banking licences, but not IDFC. Have the tight norms prompted you to re-think the decision?

No, we are not pulling out of the race. We have applied for a new banking license from a long-term strategic perspective. Yes, in the near-term, there will be an impact on the return on equity (ROE) as there are costs involved in becoming a bank − statutory requirements, priority sector lending, and branch expansion. We have said that we are prepared for single-digit ROE in the near-term. After the license is issued, it will take another two years for the bank to become operational.

But in the long run, asset diversification is important for us, both from a risk and growth point of view. We need to have a more diversified source of funds. As we grow, we need to have more stability in the liability framework too, which can be achieved through a bank structure. Over a longer 10-15 years time, banking is a more stable business.

Also you get to tap into a larger revenue pool, which we were not able to do before.

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